The Beauty of Cash

Bill Parrott |

Cash is wonderful. Simple. Humble. It never boasts when times are good, nor complains when times are tough. Cash is an asset like stocks or bonds or real estate, but it doesn’t get any respect – like Rodney Dangerfield, but it should, particularly when the stock market and economy are struggling.

CEOs who hold large amounts of cash get ridiculed for not deploying it to acquire other companies, buy back their stock, or pay a dividend to shareholders as if holding cash was a sign of weakness.

Warren Buffett, CEO of Berkshire Hathaway, holds $128 billion in cash, and it has been suggested he “buy blue-chip stocks, invest in Boeing, or provide rescue financing to companies in the travel industry.”[1] Instead, Mr. Buffett recently sold all his airline stocks to raise more cash. Mr. Buffett has made his billions by investing for the long haul, being patient, and utilizing cash.

Tim Cook, CEO of Apple, has also been criticized for carrying too much cash on the balance sheet. Apple currently has more than $100 billion in cash and short-term investments, and he has been urged to buy other technology companies. Fortune thought Mr. Cook should have purchased Netflix last year, calling it “his biggest blunder so far.”[2] A money management firm posted an open letter on its website to Apple and Tesla, suggesting they merge, saying, “Apple lost its innovative soul when Steve Jobs passed away in 2011.”[3]

Berkshire Hathaway and Apple have pristine balance sheets that must be praised, not mocked. Companies and CEOs who pay attention to the bottom line can survive recessions and depressions.  If two iconic investors are holding billions of dollars in cash, shouldn’t we pay attention? Is it time to give cash some respect?

What is cash? Cash can be dollars you carry in your wallet or keep in your bank. It can also include short-term certificates of deposit or US Treasury Bills.  Any liquid, guaranteed investment maturing in one year or less is considered cash, at least for investment purposes. A money market will invest in short-term obligations, so you can park your money in a money market fund as well. 

As interest rates approach zero, does allocating a portion of your assets to cash still make sense? It does. Despite low rates, cash is liquid and safe like few other investments.

Cash does have a downside. As a long-term investment, it does not hold up, and it will barely keep pace with inflation. Investing in stocks is still the best way to create generational wealth, but if you need to preserve your wealth in the near term, invest in cash. If your time horizon is five years or more, allocate most of your assets to stocks.

What can you do with your cash? Here are a few ideas.

  • Emergency Fund. Your emergency fund should have enough money to cover three to six months of expenses. If your household expenses are $10,000 per month, your emergency fund balance should be $30,000 to $60,000.  During challenging economic times, you might want to increase your fund balance to cover nine to twelve months of expenses.
  • Opportunity Fund. Setting aside money for opportunities is also recommended. How much money is appropriate for this fund? It depends on what you want to buy or where you want to go.
  • Retirement. If you are within five years of retirement, my recommendation is to keep three to five years of expenses in cash. If your annual household expenses are $100,000, your cash balance should be $300,000 to $500,000. A large cash balance allows your stocks to recover if you were to retire during a down market like we are experiencing today.
  • Purchases. If you need to buy a car or pay for college tuition, keep your money in cash regardless of the time frame. Also, allocate your money to cash if you need it in one year or less.  
  • Borrowing. It’s common for people to rely on debt to finance cars, homes, education, etc. But what do you do if your bank freezes your credit? Wells Fargo has stopped issuing home equity loans, and they will only refinance jumbo mortgages for clients who hold at least $250,000 in liquid assets with their bank.[4] A cash balance gives you access to your capital regardless of your bank's internal policies.
  • Risk Reduction. Allocating a portion of your assets to cash will reduce your risk. Your risk will fall by 23% when you allocate 30% of your portfolio to cash or short-term investments. Stocks outperform cash significantly over time; however, for the past two years, this has not been the case as stocks have fallen 4.5% from January 1, 2018.[5]

Calvin Coolidge said, “Use it up, wear it out, make it do, or do without.” Mr. Coolidge was a fan of cash, and we ought to follow his advice today. If you have the money to buy something, go for it. If not, save your money until you do.

Cash has always been king, and it should be given the respect it is due. Treat it as a valued asset, and it will bring you peace, and it may even enhance your portfolios overall performance.

I don’t get no respect – Rodney Dangerfield

May 4, 2020


Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and are not suitable for every investor.